TAX FACTS: Top House Democrats Enter Tax Reform Fray

WASHINGTON (Dow Jones)--House Minority Whip Steny Hoyer, D-Md., said Tuesday he would push fellow Democrats to put an overhaul of the U.S. tax system at the top of their agenda if they regain control of the House in the November elections.

"I believe there is an increasing momentum among taxpayers for real reform, and Democrats have an opportunity to lead on this issue when we regain the House majority in November," Hoyer said in a speech before the Urban Institute.

Hoyer said Democrats and Republicans share blame for creating the nation's complicated income tax system.

But while Republicans have talked about simplifying the tax code, since 2001 they have "made 227 changes to the tax code and added more than 10,000 pages to it," he said.

House Republicans plan a number of events related to tax simplification for next week - the week before the Democratic National Convention in Boston.

Republican leaders likely will bring to the House floor a number of bills making changes throughout the tax code, a House Republican aide said. No decisions, however, have been made, the aide said.

The bills likely will include measures already passed by the House in other pieces of legislation.

The House Budget Committee is also planning hearings on how the costs of major tax changes are estimated. Republicans have long complained that the Congressional Budget Office does not accurately estimate the stimulative effect to the economy that such sweeping proposals would have.

Hoyer criticized the Republican plan.

"House Republicans cannot spend two days talking about simplification and still honestly claim that they are tax reformers," Hoyer said.

Still, Hoyer said, some of the proposals offered by Republicans may garner Democratic support.

For example, five of the tax code breaks for families with children have different definitions of a qualifying child.

Republicans may bring to the floor legislation creating a single definition of a child for the tax code, a change Hoyer said he would welcome.

Hoyer also said tax simplification should allow the vast majority of Americans to opt to allow the IRS to calculate their taxes. Such a system would require filing slightly more information with the IRS as part of an employees' W-4 form, but would mean they would not have to file an income tax return at year's end.

In other areas, though, Hoyer was less specific.

He said lawmakers should reform the alternative minimum tax, simplify tax rules for small businesses, stop tax cheating, "make sure that the IRS can do its job," and hold hearings on tax reform.

Study Questions Retirement Savings Tax Breaks

Nearly 70% of the share of after-tax benefits from tax-preferred retirement savings plans go to the top fifth of income earners, according to a study released this week by the Urban Institute.

The group argues that the targeting of the benefits of these breaks is an issue not only of fairness, but of efficiency.

The study says that wealthier Americans tend to fund contributions to tax-preferred savings accounts by dipping into other resource pools rather than by reducing consumption. The study also says that wealthier Americans may already have adequate resources to fund their retirement, and therefore do not need to be enticed to save more.

Conversely, people in the lowest fifth of income earners receive little benefit from the current tax breaks because few contribute to retirement savings plans and those that do contribute only contribute a small percentage of income.

"Thus, retirement savings programs targeted at households with high income and high wealth will not encourage savings where it is most needed," the study concludes.

The authors note that accelerating increases in contribution limits - as is being considered in Congress - will only exacerbate the current imbalance. On the other hand, a direct subsidy for lower-income retirement savings would be better targeted.

Opponents argue that such subsidies, paid in the form of so-called refundable tax credits, are just another form of welfare.

The study compares the current value of the tax breaks for contributions made annually to tax-preferred savings accounts. By far the bulk of these contributions are made to employer-sponsored pension plans. Contributions to individual retirement accounts are a distant second.

When measured as a share of income, the largest tax benefit of these tax preferences go to households with income of $75,000 to $500,000, the report concludes.

According to the report, the tax benefit of contributions to employer-sponsored pension plans and to individual retirement accounts ranges from about 0.1% of income for the lowest fifth of income earners to 1.4% for the top fifth.

According to the White House's Office of Management and Budget, the total present value of the federal revenue loss from tax-deferred contributions to employer pension plans exceeds $184 billion.

On average, these breaks reduce the present value of taxes owed by $531 per person, or about 1.2% of income.

"Despite the magnitude of these revenue losses and the sizable roll of tax-deferred savings in providing retirement income, the distributional effects of these programs has received little attention," the report says.

The report was written by Leonard Burman, William Gale, Mathhew Hall and Peter Orszag.